The most significant interest rate hike in the last 15 years has recently happened in Turkey, as President Tayyip Erdogan struggles to stop the country’s currency from crashing even further. The benchmark interest rate saw an overnight increase of 6.25% to a hefty 24.00%. In comparison, the official cash rate in Australia is polarised at a record low of 1.5%, along with similar levels throughout Europe.
So what do you do if you have cash at your disposal? Enjoy the high life and splurge it on holidays and a hot tub for your deck? Keep it stashed in the bank?
Cash assets are of course, liquid and safe but they also generate the lowest returns. According to the ASX report, they averaged just a 2.8% annual return over 10 years in Australia. Investing your cash, and not spending it on those depreciating assets, is the only way to ensure you have financial freedom and better long-term outcomes.
If you have money put aside, or your small business is trading in profit, then you will want to make some serious decisions to generate returns. Different assets will perform differently over time, and the results can vary significantly. Those with the greatest risk level should always be viewed as long-term investments.
So, let’s take a look at 5 different asset classes, their risks, and the related historical information. Always remember that this is not a guarantee of their future performance!
Put Your Money In Property
This is potentially one of the lower risk options. If you take a look at the 2018 Russell Investments Long-Term Investing Report, then you will see why. Investment in residential property showed an 8.1% annual return over the ten years to 2016. It’s a popular choice for Australians, and the property market continues to attract investors and boom across the country in many areas.
Of course, like anything else, the property market will have ups and downs, so it’s critical that you choose the right time, the right area and keep your eye on the Home Value Index. If domestic prices start to slow down, then there are also many benefits to investing in the commercial property market.
Take A Look At Fixed Income Assets
Fixed income assets are another option that can provide a relatively reliable, low-risk return. The ASX report shows an average 6.1% annual return for Australian bonds over 10 years, so they are well worth considering. They may well sound boring, but as part of an investment portfolio, they really help to offset losses that can occur with more speculative investments, such as the stock market.
The most common assets are Australian government bonds, where you are essentially lending the government money, which they then return with interest. The interest will be paid in instalments, so it also provides a regular income throughout the length of the bond.
Trade Safely With Exchange Traded Funds (ETF)
An ETF is primarily an investment fund that is traded on stock exchanges and holds assets such as property, commodities, stocks or bonds. It can be a great, low-cost method of gaining exposure to a range of assets without a high investment and the associated risk. They generally have a mechanism that keeps the trading relatively close to the value of the net asset, and they have lower fees than other types of managed funds. Despite this, they still have a risk attached but will typically provide a good return over the longer-term.
Index funds in Australia are usually “passively managed” ETF’s, which means that they track either a portfolio of assets or a market index like the Australian Securities Exchange. An index fund will generate a return that usually matches the tracked index, and also gives you access to a wide range of assets to reduce the risk.
You can buy and sell ETFs on a stock exchange so you will need a reliable stockbroker or an online trading account.
Take A Measured Risk With Stocks, Shares Or Currencies
For those who can tolerate a higher risk investment, stocks, shares or currency can be a profitable option. Depending on the equities you choose, they can provide both short-term and long-term returns, but can also generate high losses. The stock market and Forex can both be volatile and are extremely vulnerable to wild fluctuations in price.
You can find available assets across properties, gold, commodities, fixed income products and foreign currencies, to name just a few. Overall, Australian shares only averaged a 4.3% annual return over the ten-year period to December 2016. However, within this average, there are huge peaks and troughs which is where the profit opportunities lie. For instance, A2 Milk produced a massive performance with a 261.3% price gain during 2017.
Investors looking for a 24-hour market and high liquidity can opt to trade world currencies on Forex. This alternative gives you access to a market far larger than the stock market, and one that offers greater flexibility and leverage. It also has the benefit of low transaction costs and a low barrier to entry. However, investing in currency can also be complex, time-consuming and risky. If you are considering this option for the first time, then make sure you have checked out our free beginners course in Forex trading before you start.
Always bear in mind that any past performance is not a reliable indicator or trend for the future with any of these investments. Great care is also needed when choosing a broker or an experienced investment advisor.
Speculate With Cryptocurrencies
For the really brave of heart, investing in cryptocurrencies can produce good profits, but it also carries considerable risk. Cryptocurrencies have been around since 2009 when the infamous Bitcoin was created. They initially attracted a small investor following, but the attention of the media was caught in April 2013, when the coin price of Bitcoin rose to a record $266. There are many currencies available now, with Bitcoin being joined by Ethereum, Ripple and hundreds of others. The market is extremely young and extremely volatile. If you had invested in Bitcoin early on, you would have been highly successful and immensely profitable. However, recent investors have lost a tremendous amount of money.
So is there a safe way to invest in cryptocurrencies?
Riding on the back of the recent cryptocurrency crashes there is a significant investment opportunity. Although the future is impossible to predict, cryptocurrencies are indeed here to stay. The best way to invest is by studying the currencies and market, then minimising risk by developing a strategy and a diverse portfolio. We would all like to buy low and sell high, but in the cryptocurrency market, this is never a given!